A decision from the Western Australian Court of Appeal is a precaution to sellers and those drafting contracts for the sale of land, to carefully consider the provisions applicable to terms contracts found in the Sale of Land Act 1970 (WA) (“Act”).
The appeal arose from a dispute between the buyer (Du Buisson Perrine – the appellants) and the seller (Chan – the respondents) of residential property in relation to the seller’s termination of the contract for the sale of the land.
The contract, dated 3 September 2012, provided for a purchase price of $2.09 million with an initial deposit of $150,000 payable in three instalments.
The contract was varied by agreement on four occasions, the last being 27 February 2013 at which time the deposit was reduced to $105,000 and payable by four instalments: $5,000 on 3 September 2012, $10,000 on 19 October 2012, $30,000 on 12 December 2012 and $60,000 on 1 March 2013. Settlement was varied to occur on 7 March 2013.
All instalments of the deposit were paid by the buyer but settlement did not proceed on 7 March 2013. On 21 March 2013 the seller served a default notice on the buyer stating that the buyer was in default under the contract for failure to complete settlement in accordance with clause 3.5 of the Joint Form of General Conditions for the Sale of Land (“GC”). The default notice gave the buyer 11 business days to remedy the default. The buyer failed to complete settlement thereafter and the seller issued a notice of termination to the buyer on 16 April 2013.
The seller commenced proceedings in the Supreme Court of Western Australia seeking a declaration that the contract was terminated lawfully and that it was entitled to the buyer’s deposit of $105,000.
The buyer disputed that the contract had been validly terminated on the basis that the contract was a terms contract under section 5 of the Act and the seller had not terminated it in accordance with section 6 of the Act.
Section 5 of the Act defined a terms contract as:
“An executory contract for the sale and purchase of land under which the purchaser is –
(a) obliged to make 2 or more payments to the vendor (over and above any deposit) before he is entitled to a conveyance or transfer of the land: or
(b) entitled to possession or occupation of the land before he becomes entitled to a conveyance or transfer of the land,
and for the purpose of this interpretation deposit includes any part of the purchase price which the contract specifies as being a deposit and provides is to be paid, whether by one or more payments, within 28 days of the execution of the contract”
Section 6 of the Act prescribed the method for termination of a terms contract as follows:
(1) Notwithstanding any stipulation to the contrary, a terms contract shall not be determined or rescinded on account of a breach by the purchaser of any term of the contract unless and until the vendor has served on the purchase a notice in writing specifying the breach complained of and requiring the purchaser to remedy the breach within the time mentioned in subsection (2) and the purchaser has failed to do so.
(2) The time referred to in subsection (1) within which the purchaser is required to remedy a breach is:
(a) where the breach consists of a failure to pay a sum of money – a date stipulated by the vendor being a date not less than 28 days from the date of service of the notice; and
(b) in any other case – a reasonable time from the date of service of the notice.
The primary judge determined that the definition of ‘deposit’ in section 5 of the Act was exhaustive such that any payments made outside the 28 day limit would render a contract a terms contract. As three of the four instalments of the deposit were made more than 28 days from execution of the contract, Her Honour determined the contract was a terms contract.
The primary judge nevertheless found that the contract had been validly terminated by the seller in accordance with section 6 of the Act. In reaching this determination, Her Honour concluded that the breach referred to in the default notice and termination notice was not the buyer’s ‘failure to pay a sum of money’, but rather the buyer’s failure to complete settlement as required by clause 3.5 of the GC.
Her Honour concluded that the breach relied upon by the seller was a breach that fell under section 6(2) of the Act, which required reasonable notice be provided in terminating the contract. Her Honour was satisfied that 11 business days was a reasonable period of notice. It followed that the seller had terminated the contract effectively and could retain the buyer’s deposit.
Competing positions in the appeal
The buyer appealed the decision of the primary judge on the ground that the breach relied upon by the seller in the termination notice was ‘a failure to pay a sum of money’ to which section 6(1) of the Act applied, requiring the seller to give the buyer 28 days’ notice of termination, which it had not done.
The seller filed a notice of contention disputing the primary judge’s decision that the contract was a terms contract. The seller argued that the definition of ‘deposit’ in section 5 of the Act was inclusive and extended to payments made more than 28 days from execution of the contract provided the deposit was labelled as such in the contract. The buyer opposed the seller’s notice of contention by supporting the primary judge’s finding that the definition of ‘deposit’ was exhaustive.
Decision of the Court of Appeal
The Court of Appeal was constituted by McLure P, Newnes JA and Murphy JA.
McLure P determined that the primary judge had erred in construing the definition of ‘deposit’ as exhaustive. Her Honour found that the definition of ‘deposit’ in section 5 of the Act first extended the common law meaning of ‘deposit’ to all payments labelled as ‘deposit’ in the contract, and then restricted the common law meaning to apply only to payments made within 28 days of execution.
The first hurdle for the seller was therefore to establish that three of the four instalments fell within the common law meaning of ‘deposit’, namely being a payment made to bind the bargain and provide security for the buyer’s performance of the contract. McLure P considered that the three instalments were so remote in time from the execution of the contract that they could not satisfy the common law meaning of deposit and the contract was therefore a terms contract.
Her Honour concurred with the orders of Newnes JA.
Newnes JA considered the intention of the legislature in section 5 of the Act. Newnes JA determined that a payment of part of the purchase price was only considered a deposit if it was classified as such within the contract and made within 28 days. As three of the four instalments fell outside the period of 28 days, His Honour found they could not be classified as a deposit and the contract was therefore a terms contract pursuant to section 5 of the Act.
His Honour then considered the buyer’s grounds of appeal relating to the type of breach upon which the seller relied in terminating the contract and found that the primary judge had erred in reaching the conclusion that the breach was not a ‘failure to pay a sum of money’ to which section 6(1) of the Act applied.
Newnes JA determined that the seller’s termination notice referred to clause 3.5 of the GC, which required the buyer to complete settlement. This imported clause 3.7 of the GC which required the buyer to pay the balance of the purchase price at settlement.
There was no evidence that the buyer had breached the contract other than by failing to pay the balance of the purchase price at settlement. On this basis, the breach referred to in the seller’s termination notice was a ‘failure to pay a sum of money’, which invoked clause 6(1) of the Act. As the seller had not provided the buyer with 28 days’ notice as required by that section, the contract had not been validly terminated.
Newnes JA allowed the appeal and dismissed the notice of contention.
Murphy JA gave a dissenting opinion on the definition of ‘deposit’, finding the definition was inclusive and extended to payments made more than 28 days from the execution of the contract provided the payments satisfied the common law definition of deposit.
Murphy JA considered that all instalments of the deposit paid by the buyer were a form of security pending completion of the contract and therefore satisfied the definition of deposit in section 5 of the Act.
His Honour reached the same conclusion as the majority concerning the breach referred to in the seller’s termination notice, but nevertheless would have dismissed the buyer’s appeal on the basis that contract was not a terms contract as all payments were classified as a deposit.
The decision forewarns the sellers of land and their representatives to:
1. Consider the implications of sections 5 and 6 of the Act before payment of a deposit via instalments is agreed to in a contract or variations to the contract;
2. Ensure that the notice requirements imposed by a seller have been met when terminating a terms contract;
3. In the case of a terms contract, consider what grounds for termination exist before issuing a termination notice, particularly to determine if the buyer may have committed some other breach aside from a failure to pay money which can be relied upon, i.e. repudiation of the contract.
KIM SAMIOTIS is the Senior Solicitor of TANG Legal. Her areas of practice include Wills and Estates Planning, Succession Planning, Deceased estates and Estate disputes. TANG LEGAL has handled 4000+ successful cases since 2002 and our focused areas of practice are Commercial Law, Dispute Resolution & Litigation, Family Law, Migration Law, Wills & Estate Planning, and Settlements.
Telephone: +618 9328 7525